How Does a Mortgage Forbearance Work?

By Steve GoodlessLast Updated Jun 24, 2020 7:18:38 PM ET
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When you’re facing a financial challenge due to sudden job loss or illness, the stress of unpaid bills certainly doesn’t improve your situation. When your mortgage is one of the bills you can’t pay, that stress level climbs through the very roof that you’re afraid of losing. It won’t take your mortgage company long to start calling you to find out when you intend to start making payments again. All banks and lenders have rules that are slightly different, but nonpayment of your mortgage will eventually lead to foreclosure, no matter how patient the bank chooses to be.

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Fortunately, there are several options for avoiding foreclosure proceedings, one of which is mortgage forbearance. Qualifying for a forbearance has some strict rules, but it could possibly save your home when times are tough. Take a look to learn more about this process and whether it’s a good choice for your mortgage.

Options to Avoid Foreclosure

You have several options when it comes to avoiding foreclosure. Although banks may work with you when you first fall behind, most will only wait a short time for you to find a new job or fix the problem that is preventing you from making payments. When you reach the time limit, the bank will initiate the foreclosure process. Once that happens, it’s very hard to stop the process.

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In most cases, once foreclosure begins, you have a limited amount of time before you will be legally forced to vacate the home. The bank then sells the property to a new owner. Foreclosure obviously severely damages your credit. Add the loss of your home to the mix, and the stress level tends to be excessive.

Obviously, most homeowners want to avoid losing their home, but they also want to avoid the negative hit their credit will take. The options to avoid foreclosure if you’re behind on mortgage payments include mortgage forbearance and a loan modification agreement. A loan modification results in a permanent modification of the loan, while mortgage forbearance is only meant to be a temporary fix.

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What Is a Mortgage Forbearance?

Like many other things that deal with real estate and finance, mortgage forbearance will look different to every homeowner and every lender. Generally speaking, it is an agreement between you and the bank that allows you to make no mortgage payments at all or reduced mortgage payments for a specific period. During the time that you are not making payments or are making reduced payments, interest will still accrue on the loan.

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Each mortgage forbearance agreement is slightly different. For some agreements, the homeowner will have to pay back the entire amount he or she did not already pay in one lump sum at the end of the forbearance period. Other agreements may distribute the amount of the skipped payments into new monthly payments for a certain time period.

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Does Forbearance Damage My Credit?

Forbearance is something that may get reported to credit bureaus, and it could negatively affect your credit score. However, it won’t affect it as harshly as a missed payment, a repossession of a vehicle, a bankruptcy or a foreclosure. It’s much better to request a forbearance before you start missing multiple payments or are in the danger zone.

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How Do I Request a Forbearance?

You will have to contact your lender directly if you want to request a forbearance. From there, you can negotiate, and the mortgage company will draw up an official forbearance agreement. It’s impossible to say what your lender will offer you because the agreement will completely depend on the type of mortgage you have, how many payments you’ve missed and the standard practices of the company.

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Generally, a forbearance has several attributes, including the amount of payment needed (if any) from the homeowner during the forbearance period, the lender’s policy on reporting the forbearance to major credit reporting agencies, the duration of the forbearance period and the rules for repaying the money after the forbearance period is over. Usually, a mortgage forbearance lasts no longer than a year.

Should I Opt for a Forbearance?

This is a tricky question, especially because you probably won’t get unbiased advice from your lender. Additionally, you may not have other appealing options available if you’re in a situation where you can’t make your mortgage payments.

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If you don’t have a financial adviser at your disposal that you can ask for advice, it’s a good rule of thumb to talk to a housing counselor. You can ask for help from a counselor free of charge through the Department of Housing and Urban Development, also known as HUD. Look at the HUD website to find an office in your area. A trained counselor can help you determine if a forbearance is a good option for you.